There are two settings affecting spaces vs tabs. One is where you mentioned:
"Window -> Preferences -> General -> Editors -> Text editors -> Insert spaces for tabs".
The other one is located in
"Java -> Code Style -> Formatter". In profile edition window "tab policy" can be chosen and also "use spaces to indent wrapped lines" can be checked. In my case that fixed the behavior you describes.

There are two settings affecting spaces vs tabs. One is where you mentioned:
"Window -> Preferences -> General -> Editors -> Text editors -> Insert spaces for tabs".
The other one is located in
"Java -> Code Style -> Formatter". In profile edition window "tab policy" can be chosen and also "use spaces to indent wrapped lines" can be checked. In my case that fixed the behavior you describes.